What Can Turn the US Dollar Around?
On the Friday after Thanksgiving, when everyone in the US is recovering from their food related festivities, the dollar fell to a new record low against the Euro. US fundamentals have not changed and over the past 48 hours and there have been no new blowups in the financial sector. Therefore the latest wave of dollar weakness was triggered by nothing more than the lack of liquidity and stop hunting in the currency markets. We can tell that this is the case because the reversal of the intraday move was just as sharp as the move itself with prices ending the US trading session not far from where they were trading on Wednesday. We have been calling for the EUR/USD to rise to 1.50 for weeks now and to some degree that target was reached (the high today was 1.4968). However we still expect further dollar weakness even if this recovery has more legs. The only thing that can save the US dollar at this point is strong holiday spending. Today is Black Friday, which marks the beginning of the traditional holiday shopping season. Most retailers offer steep discounts to attract buyers and sales during this time are used as barometer of spending for the entire season. If sales are weak despite the sharp discounts, then the belief is that sales could remain weak throughout November and December. Spending could actually be decent this holiday because we could see a rise in tourism. With the US dollar so weak, foreigners may come to the States to do their holiday shopping. Consumer spending is the backbone of the US economy. If spending is strong, then the Federal Reserve may not need to lower interest rates as aggressively as traders are currently anticipating. Oil prices are also failing below $100 a barrel. If it continues to taper off, consumers could become more liberal with their spending. There are no US data due for release tomorrow but the rest of the week does contain market moving data. We are expecting consumer confidence, durable goods, existing and new home sales, the Beige Book report, US GDP, personal income, personal spending, Chicago PMI and construction spending.

Is the Euro Topping Out?
Even though the US dollar fell to a new record low against the Euro overnight, the Euro failed to hold onto those gains. The currency pair’s struggle to sustain its upside momentum over the past three trading days has everyone wondering whether this is the top. Unlike the US, there are fundamental reasons behind today’s intraday reversal. For the most part European economic data was weak. Manufacturing PMI accelerated but service sector PMI deteriorated and French consumer spending fell by the biggest amount in over a year. ECB President Trichet also said that he is opposed to brutal currency moves while Airbus is complaining loudly about the damage of a weaker dollar. It is important to point out that Trichet did not call the latest move in the Euro brutal, but simply indicated his discontent with volatility in the currency markets in general. The pressure is heating up for the central bank president to do something about the currency but his reluctance to do so reflects what must be very strong inflationary pressures. Eurozone and German CPI are due for release next week. They could be particularly market moving because strong numbers will indicate that the ECB has their heads in right place while weaker numbers will raise doubt as to whether they are putting their focus in the wrong places. In addition to the inflation data, we are also expecting the German IFO report, retail sales, unemployment and Eurozone Retail PMI.

British Pound: Up to 75bp of Easing Next Year
The outlook for the British pound deteriorates by the day. Third quarter GDP was weaker than expected with growth increasing by only 0.7 percent compared to the market’s 0.8 percent forecast last quarter. The housing market also remains weak with BBA mortgage approvals falling to a record low. This prompted Bank of England member Lomax to warn that monetary policy may be restrictive which suggests that rate cuts are on the minds of UK policy makers. The recent deterioration in UK economic data and the dovish Quarterly inflation report has traders now pricing in 75bp of easing by the middle of next year. We do not expect next week’s housing data, CBI distributive trades survey and consumer confidence to be much of a help as the currency looks poised for further losses.

Stronger Gold and Oil Prices Take Australian, New Zealand and Canadian Dollars Higher
Gold and oil prices are up today which has helped to push the Australian, New Zealand and Canadian dollars higher. Despite sharp intraday price action throughout the past week, the commodity currencies have remained mostly range bound. With the exception of the Canadian dollar, there is not much data to threaten trading ranges in the coming week. We are only expecting the New Zealand trade balance and some minor Australian data. Canada on the other hand has a number of reports due out at the end of the week. This includes the current account, industrial product price index and GDP. Canadian data has taken a turn for the worst and as a result we expect the data to trigger further gains in USD/CAD.

Post-Thanksgiving Day Rally in Stocks Fails to Help the Yen Crosses
Despite a strong post Thanksgiving Day rally in US stocks, Japanese yen crosses remain very weak. With the exception of AUD/JPY and NZD/JPY, all of the other yen crosses ended the US trading session in negative territory. Last night, the US dollar fell to a new 2 year low of 107.56 against the Japanese yen as the outlook for the US dollar continues to weigh on the market’s overall risk appetite. In the week ahead there are a lot of very important Japanese data that will try to wrest control of the yen away from the equity markets.

Kathy Lien is the Chief Currency Strategist at FXCM.